Is CWB being punished for good perfromance?

  On September 15, Canadian Western Bank (CWB) released it's third quarter performance and what a quarter it was.The normally staid Canadian Western Bank showed double digit loan growth,higher net interest margins and adjustable cash earnings per share of $.75 per share which is up 9%.In addition, it raised it's  quarterly dividend to $.26 per share which is up 8% over the same quarter in 2017.What could be better than that?Well actually the share price could go up,not down!Before the quarterly report the share price was about $38/share and now it trades at $33 per share.

Second Quarter Highlights

Total loans reached $25 billion for the first time in the second quarter.This was achieved by 12% loan growth over the second quarter in 2017.And the CEO expects 2018 to have double digit loan expansion.Once again their growth in Ontario has been a significant part of this loan expansion.Shareholder's net income for Q2 was at $62 million which is up 11% over 2017;and for 9 months was $2.23 per share.Consequently adjusted earnings per share is on track to hit $3.00 per sharefor 2018.CWB tells us that their acquisition of ECN Capital assets contributed $.04 per share to total earnings.And that there was a significant contribution for their expansion into Ontario.

Safety Concerns

CWB is not only a bank with good growth but it is safe for investors also.It has very strong Basel III capital ratios.All capital ratios are at the upper limit of requirements.Also it's provision for loss income is up by $111 million or 10%.On the other hand, impaired loans now make up only .53% of assets compared to .74% in 2017.The dividend has been raised but the payout ratio remains in the 30-36% area which is considered very safe.And it's price/earnings ratio is at 12 which is quite conservative for Canadian banks which on average is higher.

Recommendations for Price Improvement

It could be that CWB  is suffering from the new kid on the block syndrome.It is growing faster than most of the established banks in Canada.After their strong second quarter results this blog thought CWB  would be trading at $40 to $41 per share.It is in effect, catching up.So it is possible that the other banks are selling off their stake in Canadian Western Bank to slow their growth.And there may be more selling to come but CWB must keep making improvements.With that in mind CWB must continue it's expansion into Ontario and even add another  branch here.This blog would like to see a separate identity called Canadian Western Trust (CWT) which would contain many of it's divisions such as CWB Maxium,CWB Optimum Mortgage,CWB National Leasing and CWB Franchise Finance.And their online divisions put together and called Mango or some such thing.Lastly in order to get more attention it could buy a small mutual fund dealer at today's cheap prices.These moves might reduce their loan growth and earnings growth which is substantial but raise their stock price.Unfortunately until retail investors join it will be a tough ride to get to $35 per share by January.

http://www.manulife.com/;https://www.fairfax.ca/

Power Financial has Simpler balance sheet plus Wealthsimple

     Power Financial has always been closely connected to Power Corp. and their finances are intermingled.But the wedge is in and now they are becoming more differentiated.For example, Power Financial hasa yield of 5.8% and market cap of $21 billion while Power Corp has a yield of 5.3% and market cap of $13 billion.Yet the biggest contributor to Power Corp.'s net earnings is by far Power Financial.And Power Corp. tells investors that it still owns 65.5% of Power Financial.And now POW tells it's shareholders that it owns 100% of Sagard Holdings and Sagard China which appears to be largely a mutual funds operation.But the big change is that Power Financial shows that it owns 81% of Wealthsimple a very large broker in Europe.As of yet no accounting has been made for  it's income contributions to Power Financial.
                  The Second Quarter
 Firstly Power Corp had a very good quarter and the main contributor to this good quarter was of course, Power Financial.PWF had a good quarter mainly because of Great West Life Insurance.Great West Life reported net earnings of $831 million and contributed $562 million to PWF.IGM Financial contributed $121 million and Pargesa Holdings a further $36 million.Total Q2 net earnings were $658 million the highest amount in corporate history.Putnam Investments, another holding, had a very good quarter.PWF had a record high assets under management (AUM).But as already mentioned ther is no mention of income contribution from 81% owned Wealthsimple.This new platform started in Canada but has spread to U.S.A and England.But as of today has only $2 billion in AUM.
                 Potential Changes
  One of the most natural changes is to make the quarterly report more investor-friendly.About the only information on the report is net earnings and the contribution from other companies to it's net earnings.Surely this is a holdover from the days when POW and PWF were so closely intertwined.Not so much information was required.This blog would like to see cash flow and free cash flow and payout ratios.Also the contribution from Wealthsimple is needed.                                                                                       
                                                                  
                       

     This blog is surprised to see that POW still owns 65.5 % of PWF.An earlier blog on Workathon showed the ownership at 61%.And frankly had hoped that the ownership would now be down to 55to 59%.This is the greatest use of funds that PWF could have.As POW takes almost 70% of their net earnings.One of my blogs on Blogdaleupsome states that the next best use of funds would be increasing ownership in Great West Life it's greatest contributor of net earnings (see Blogdaleupsome 04/05/2018).Qtrade,a small financial broker,shows that  PWF cash flow in 2017 was about $1.7 billion.That will be minus the $800 million paid to POW.This is still a tremenduous amount of cash that can be used to pay down POW ownership  in PWF and increase ownership of GWO and also expand investment in Wealthsimple.Power Financial moves slowly and so there will not likely be large changes made in 2018.Look for PWF to stay in a tight range around $30 in 2018 but also look for news about increasing ownership of Great West Life or decreasing ownership from POW.                                https://www.powerfinancial.com/en/